INSIGHT: US PVC producers wait for benefits of housing recovery

06 August 2013 19:09[Source: ICIS news]

By Ken Fountain

HOUSTON (ICIS)--For US producers of polyvinyl chloride (PVC) and other vinyl derivatives, 2013 has thus far been a perplexing year.

This was the year the long-hoped-for rebound in the US homebuilding sector would finally take effect after years of virtual drought. US house sales had begun falling in July 2005, when they reached 1.39m. By July 2011, they had reached 296,000.

Through most of 2013, many measures have shown increasing demand for new housing as the US economy continues its fitful recovery.

The most recent figures released by the US government showed that sales of newly-built, single-family homes jumped 8.3% to a seasonally adjusted, annual rate of 497,000 units in June.

While still far below levels in 2005, the rate was still the fastest recorded since 2008, the worst year of the global recession.

Homebuilder groups championed the news with gusto.

“The takeaway from this report is that the housing recovery is solidly on track and isn’t going to be derailed by slightly higher mortgage rates,” David Crowe, chief economist for the National Association of Home Builders, said of the June report.

Crowe was referring to the slight bump in mortgage rates that came after the Federal Reserve signaled that it might soon begin tapering back its policies of holding rates near zero and quantitative easing in response to increasingly positive economic indicators.

So why, vinyl-chain producers ask themselves, has the housing recovery not filtered down to substantially increased sales volumes for their own products, so intrinsically tied to home construction?

The answer may lie in changes in the kind of housing that consumers are looking for in what some call the New Normal.

US PVC producers have struggled through the first half of 2013 to implement price increases. At various points during the year, they have cited growing demand, tightness in supply and feedstock costs for the proposed increases.

But after achieving increases earlier in the year, producers have more recently fallen short in their attempts.

Perhaps more importantly, they have also struggled to maintain volumes, a point raised in the recent round of second-quarter earnings conference calls.

In early August, newly formed vinyls producer Axiall, the result of the merger of Georgia Gulf with the commodity chemicals assets of PPG Industries, noted that industry-wide operating rates have been below 90% for most of 2013, atypical during times of economic expansion. That has been driven by only a 2% increase in domestic demand and sluggish export demand.

“This is clearly a different environment than we expected at the beginning of the year and this type of environment may continue for the remainder of the year,” CEO Paul Carrico told analysts the outset of the conference call.

Asked about that particular point later, Carrico said that as the homebuilding sector picked up, he expected “a more or less robust PVC market” in the US.

“What we’ve seen is, I don’t know whether it’s the speed of the housing or there’s a delay factor, but that type of demand realisation did not really play out this year,” he said.

Carrico said it seems that the market is on track for continued growth, but the speed of that growth in uncertain.

“It’s clearly not what most people expected, but I would also say that it should get here sooner or later whenever housing does get a little bit more momentum or houses get to the point where they start using our materials,” he said.

In the meantime, Carrico said, producers are in “a waiting pattern for a larger pickup in PVC”.

At least one industry observer thinks part of the problem for PVC is the types of housing being built following the recession.

Whereas single-family homes have long been the driver of the industry, more recently it has been the multi-family sector that has been leading the way, said Fred Peterson of Probe Economics.

At the same time, new US households, perhaps wary of taking on the inflated levels of debt that helped lead to the bust of the mid-2000s, are looking to purchase smaller homes than the larger homes popular in the housing boom, Peterson said.

Despite those notes of caution, many in the vinyls industry feel the rebound in PVC and other vinyl derivatives is imminent.

Dick Doyle, CEO and president of the trade group The Vinyl Institute, noted in an email that after four years of decline through 2009, US housing starts increased modestly in 2010 and 2011 and then accelerated in 2012.

“Vinyl resin production and sales increased for the third straight year in 2012,” Doyle noted, adding that US production of resins was up 6.1% to 15.2bn lb (6.89m tonnes) that year.

“The resurging housing market in 2012 drove increased vinyl sales to related markets,” he said, including windows and doors, rigid pipe and tubing, siding and accessories and fencing and decking.

“So, while we would hope to see a more robust building and construction recovery, we continue to see modest growth and pockets of exceptional regional growth,” Doyle said. “Vinyl products are positioned extremely well to benefit as the building and construction markets recover.”

Major US producers of PVC include Axiall, Formosa, Shintech and Westlake.